Byline: Richard Darwin, Esq.
Here is a realistic to-do list for employers who are at risk of a mass defection or the theft of valuable company assets, or who have already suffered such an incident. It shows ways to minimize a company’s risk of losing valuable employees and property and maximize its chances of success in the event of subsequent litigation.
It happens with alarming frequency, in every conceivable industry: a group of employees leaves en masse to join or start a competing operation. More often than not, the mass defection is organized ahead of time, well coordinated, and instigated by either an aggressive competitor and/or an inside “ringleader.” And in many cases, the departing employees take valuable and confidential assets belonging to their former employer with them when they leave.
These assets can take a variety of different forms, depending upon the employer’s industry: customer lists, source code, business plans, financial data, marketing strategies, sales leads and product designs are just a few examples of items that have been stolen by defecting employees.
A variation on this theme was in the news in late June when an executive administrative assistant at Coca- Cola and two other people were arrested and charged with stealing trade secrets related to a soft drink the company was developing. The trio allegedly tried to sell the secrets to Pepsico for $1.5 million, but Pepsico contacted authorities. And while the incident was not a defection of employees, it is alleged to have involved the theft of documents, as well as a sample of the beverage. Coca-Cola CEO and chairman Neville Isdell told employees in a memo on July 5 that the alleged trade-secret theft “underscores the responsibility we have to be vigilant in protecting our trade secrets.” Isdell said he was directing “a thorough review of our information protection policies, procedures and practices to ensure that we continue to rigorously safeguard our intellectual capital.”
When such valuable assets are removed by a group of defecting employees, they give the workers and their new employer a competitive advantage in the marketplace. The former employer, on the other hand, is usually left scrambling to pick up the pieces as it tries to assess the damage, salvage customer relationships and replace the employees who have decamped.
The policies and principles in play Any time employees leave to compete with their former employer, two competing principles come into play. On one hand, the law generally recognizes and protects an individual’s right to pursue the job or profession of his choice and to utilize the knowledge and experience gained from previous positions for the benefit of subsequent employers. On the other hand, the law prohibits employees from stealing company assets and using them for their own gain, and protects their former employers from acts of unfair competition.
An employer’s goal is to institute policies, procedures and contingency plans that protect the company from the theft of its assets and other unfair business practices without unreasonably restricting the rights of employees to pursue other job opportunities. One of the most common forms of unfair competition facing companies today is the employee raid, loosely defined as the simultaneous, coordinated defection of a group of employees to a single competitor. While there is nothing inherently illegal about two or more employees leaving a company to join another at the same time, it is far too often the case that mass defections are accompanied by the theft of company property and other acts of unfair competition.
An employee raid usually involves one or more instances of the following types of illegal and unethical conduct:
• Removal of confidential and proprietary documents and computer files.
• Pre-resignation recruitment of subordinates by internal ringleaders, frequently managers and executives.
• Pre-resignation solicitation of company clients and customers.
• Destruction/deletion of important documents and electronic files.
• Defamatory statements about the former employer to customers, vendors and other employees.
Protecting a company from an employee raid While it is impossible to keep employees from changing jobs in the first place, the following are some steps a company can take to protect its confidential information and proprietary assets when employees do leave, and to maximize its chances of recovery in the event those assets are stolen.
• Identify and catalog the company’s trade secrets–i.e., any information that provides the company with a competitive advantage and derives value from the fact that it is not known to competitors. Put some thought into this. Many companies never reflect upon what their trade secrets are until they have already been stolen.
• Once the trade secrets have been identified, take steps consistent with those used by others in the relevant industry to maintain the secrecy of confidential information. This includes password-protected computer networks and databases, locked cabinets containing hard copies of sensitive materials, “confidential” stamps and footers on sensitive documents, and confidentiality training programs.
• Have all employees sign confidentiality agreements. Make the agreements short and uncomplicated. Specifically describe the company’s trade secrets and other valuable assets and make sure the employees explicitly acknowledge that those assets are valuable and must never be disclosed to a competitor or third party, even after their employment ends.
What to do immediately after an employee raid After an employee raid has begun, or has already taken place, a company’s focus will naturally shift from preventive measures to damage control. Time is of the essence. As each hour and day passes, evidence is lost, computer files are overwritten and a company’s ability to recover stolen assets (or prevent their use by a competitor through legal action) deteriorates. This checklist shows the steps that an employer, in conjunction with its counsel, should take as soon as it learns that an employee raid is taking place:
• Secure any computers that were used by the defecting employees; keep them in a safe place and make sure no one uses them.
• If the IT department recycles backup tapes, immediately suspend that practice to avoid overwriting critical evidence.
• Check the offices or workspaces of the defecting employees for missing files, records and documents.
• Secure security-camera tapes, if the building has such technology.
• Call the company’s lawyers–either in-house or outside counsel, or both–and get them involved.
• Interview witnesses. In almost every case, someone was left behind who wanted to go, or was asked to join the defecting employees but chose not to do so. The testimony of these individuals will often be the source of some very powerful evidence.
• If some or all of the departing employees have given notice of their resignation, but have not yet left the premises, ask them to provide detailed exit memos summarizing the status of their pending projects. This is a no-lose proposition. If they provide the requested information, it will be tremendously helpful in getting their replacements up to speed during the transition period. If they refuse, they will have made it significantly easier to prove in court that they intended to cause harm to the company.
• Document any expenses and damages related to the raid and its consequences, such as headhunter fees, lost customers, lost business orders, etc.
This is not an exhaustive list. Rather, it is meant to be a starting point for any company that is serious about protecting itself from employee raids and the theft of its confidential information and assets. Every industry is different, and will likely require some steps that are specific to the peculiarities of a particular market or trade.
The ultimate goal for all companies, of course, is to minimize the risk of loss and maximize the chances of obtaining a quick and successful outcome in the event of litigation.
Richard C. Darwin is senior counsel at Buchalter Nemer in San Francisco, California. His practice focuses on intellectual property including patent, copyright, trademark and trade secret disputes. E-mail email@example.com to comment.